Government Funding Law Changes Rules Regarding Dual Eligibles and the Medicaid DSH Hospital-Specific Limit

The recent Consolidated Appropriations Act, 2026 (2026 CAA) modified the rules on how costs and payments related to patients eligible for both Medicaid and another payer (“dual-eligible patients”) are included in the hospital-specific limit that sets the maximum amount hospitals can receive in Medicaid disproportionate share hospital (DSH) payments each year.¹ The new law updates a change made by Section 203 of the Consolidated Appropriations Act, 2021 (2021 CAA) that resulted in cuts to hospital DSH payments, which itself was preceded by years of litigation.² The new legislation requires hospitals to include costs and payments related to dual-eligible patients, but only if costs exceed payments.

The legislation creates an opportunity for certain hospitals in certain states to revise DSH payment methodologies for state plan rate years beginning after October 1, 2022 and obtain additional payments related to this new inclusion.

Background

In 2008, CMS published a final rule interpreting new requirements regarding Medicaid DSH reporting. Numerous questions remained and in 2010 CMS provided guidance concerning many aspects of the hospital-specific limit, including with respect to the inclusion of costs and payments related to dual-eligible patients. The 2010 guidance provided that hospitals must include costs and payments related to dual-eligible patients. This position benefited some hospitals (i.e., those whose payments were less than their associated costs) but not others (i.e., those whose payments exceeded their associated costs) and litigation followed, with opinions going both ways. In 2017, CMS promulgated a regulation codifying its 2010 guidance, which regulation largely was upheld by the appellate courts.

Four years later, Congress stepped in and changed the law. The 2021 CAA generally precluded inclusion of costs and payments for dual-eligibles for most hospitals effective October 1, 2021. An exception was made for hospitals in the 97^th percentile or above with respect to the number of Medicare supplemental security income (“SSI”) days or percentage of Medicare SSI days to total inpatient days, which were permitted to use the prior methodology and receive the higher amount according to the two calculations.

The New Development

The 2026 CAA changed the law again to specifically allow inclusion of dual-eligible costs, provided they exceed payments, for all hospitals for any state plan rate year beginning after February 3, 2026. The provision eliminates the prior exception, which is no longer relevant. The new law also allows states with unused Medicaid DSH allotments for any state plan rate year after October 1, 2022 to submit state plan amendments to retroactively claim that unused DSH allotment to make payments to cover the newly eligible costs, notwithstanding time limits, as long as the payments are made before the DSH audit report is due.³

The New Opportunity

If you are a hospital with costs related to dual-eligible patients that exceed payments received for those patients, there may be an opportunity to receive additional Medicaid DSH payments in the future, or even related to prior state plan rate years, if there is an unused DSH allotment. If you are interested in investigating further, please contact your Dentons lawyer.

1. Pub. L. No. 119-75. In addition, the 2026 CAA eliminates two years of DSH allotment reductions previously scheduled to take effect on January 30, 2026; one year of DSH allotment reductions remains in statute, scheduled to begin in federal fiscal year 2028. ↩︎
2. Pub. L. No. 116-260. ↩︎
3. Pub. L. No. 119-75, Div. J, Section 6106. ↩︎